A warning ignored

Our recent economic recession was to be corrected by the application of “Government Stimulus”.  We have all been treated to speeches about shovel ready projects.  The concept of public works projects as a method of reversing an economic recession has been discredited for decades.

Ludwig von Mises leader of the Austrian School of economics wrote his masterpiece “Human Action” in 1940.  This book was later translated into English in 1949.  The following article is excerpted from chapter 31:

The Chimera of Contracyclical Policies

This article exposes in a few paragraphs the faulty logic that has been used to justify the unimaginable expansion in Federal spending.  The following are some of the highlights of the article (remember as you read this it was written in 1940):

An essential element of the "unorthodox" doctrines, advanced both by all socialists and by all interventionists, is that the recurrence of depressions is a phenomenon inherent in the very operation, of the market economy….the interventionists ascribe to the government the power to correct the operation of the market economy in such a way as to bring about what they call "economic stability." … What they want is to expand credit more and more and to prevent depressions by the adoption of special "contracyclical" measures.

In the context of these plans the government appears as a deity that stands and works outside the orbit of human affairs, that is independent of the actions of its subjects, and has the power to interfere with these actions from without….What is needed to make the most beneficent use of this power is merely to follow the advice given by the experts.

The most advertised among these suggested remedies is contracyclical timing of public works and expenditure on public enterprises. The idea is not so new as its champions would have us believe. When depression came, in the past, public opinion always asked the government to embark upon public works in order to create jobs and to stop the drop in prices….If, however, the government resorts to the cherished inflationary methods of financing, it makes things worse, not better. It may thus delay for a short time the outbreak of the slump. But when the unavoidable payoff does come, the crisis is the heavier the longer the government has postponed it.

All this talk about contracyclical government activities aims at one goal only, namely, to divert the public's attention from cognizance of the real cause of the cyclical fluctuations of business. All governments are firmly committed to the policy of low interest rates, credit expansion, and inflation. When the unavoidable aftermath of these short-term policies appears, they know only of one remedy — to go on in inflationary ventures.

Ludwig von Mises was warning us in1940 that government policy of low interest rates, credit expansion, and inflation was a recipe for disaster.  Hopefully today more people are willing to listen to this warning.